Publish in Perspectives - Monday, January 26, 2015
The Brazilian electric power sector began 2015 with unfavorable prospects as a result of natural conditions and financial problems. (Photo: Eletrobras).
Will power rationing become necessary in Brazil?
BY ENERGY ADVISOR
Moody's in December downgraded Brazilian electricity company Eletropaulo's debt rating, citing deteriorated hydrology conditions and their impact on the company's liquidity as well as the risk of power rationing amid Brazil's worst drought in eight years. At the start of December, the country's most important dams were at an average capacity of only 16.1 percent, with many analysts noting that without heavy rains, some sort of savings program would be necessary. Will power rationing become a reality? What is the outlook for Brazil's hydropower sector and development of new projects? What steps should Brazil’s new energy minister, Eduardo Braga, take to address the electricity sector's top challenges?
Nivalde J. de Castro, professor and coordinator of the Grupo de Estudos do Setor Elétrico (GESEL) at the Universidade Federal do Rio de Janeiro: The Brazilian electric power sector (SEB for its initials in Portuguese) began 2015 with unfavorable prospects as a result of two factors: natural conditions on one hand and financial conditions on the other. On one side, the effects of the worst hydrological crisis of the last eight decades will persist, which will necessitate the activation of thermal power plants throughout the year given that reserves began 2015 at their lowest ever level. If the affluence during the rainy season, which runs until early May, is not enough to restore the reservoirs, rationing will have to be adopted. But as the SEB depends on nature, it cannot be said for sure that rationing will occur. The hydrological crisis has directly affected the financial side, contracts in the SEB, creating billions worth of liabilities, which forced the government to adopt creative measures, especially for the financing of about $8 billion to cover the cash flow of distributors and that will be paid over the next three years by consumers. Another measure to contain the financial crisis was taken by regulatory agency ANEEL in December when it reduced the short-term market price, which applies to all agents not covered by contracts, by 53 percent. And starting in January, a 'tariff flag' system will be adopted that will impose on consumers in the captive market a monthly price signal related to the level of activation of thermoelectric plants. There are three flags—white, yellow and red— which may increase the rate by as much as 8.7 percent, seeking to reduce consumption and mitigate the impact on distributors' cash flow. Due to the mismatch between the annual rate adjustment in 2014 and the extra costs of thermal, energy from Itaipu that is purchased with dollars and other issues, the affected distributors will require an extraordinary tariff revision, as already agreed with ANEEL. Thus begins a period of 'tariff realism' as affirmed by the new finance minister, Joaquim Levy. Finally, the natural and financial crisis will affect new investments in generation and transmission made through auctions that award winners with long-term contracts: the policy of prioritizing low rates will have to be revised, and the rate of return on investments will have to be increased due to the greater risk that the crisis, in its two dimensions, poses to the SEB.
Bernardo Bezerra, project manager, and Luiz Augusto Barroso, director, at PSR in Rio de Janeiro:
In the short term, Brazil is indeed facing a difficult time in the electricity supply. The low storage levels of the main hydro plants surely pose threats to the security of supply. Energy supply capabilities are dependent on the wet season. PSR on Jan. 15 estimated the risk of energy rationing in 2015 as being 36 percent and 30 percent in the South/Southeast and North/Northeast systems, respectively, but it is important to highlight these estimates vary dynamically as the wet season unfolds. One important clarification is that the current difficulties are mostly due to deficiencies with structural electricity supply and construction delays. Contrary to popular belief, the hydrological situation of the 2012 to 2014 triennium has not been extremely severe for the power sector. In the medium and longer term, we believe the energy sector can recover, despite the current short term setbacks. Most of the power sector market model is robust; it is more a question of 'stop meddling' than 'go back to the drawing board.' Even with reduced economic growth, there is a need for new capacity, and the long-term electricity contracts for new capacity are still attractive. Hydro plants will still play a key role in future resource development, but environmental constraints and cost pressures will be increasing. Finally, the next steps Brazil should take are to restore transparency, good governance and invest in efficient management. If we succeed in these (admittedly hard) tasks, Brazil may become again a benchmark for a diverse and flexible energy matrix.
Peter Newborne, research associate to the Water Policy Programme at the Overseas Development Institute (ODI): If power has to be rationed in Brazil, it will not be due to household demand, which only accounts for 25 percent of national electricity consumption. Instead, it will be because of high energy-consuming industries such as aluminum-smelting. This can be observed in the Ministry of Energy's medium-term plan, which sees heavy industry maintain its higher share (44 percent) of electricity usage until 2030, as compared with the services sector (25 percent)—rather strange for an apparently mature economy like Brazil's. This industry focus is seen in the level of energy used in production in Brazil that is going in the opposite direction of the target set by 'Sustainable Energy for All,' the United Nations' global initiative. During a recent visit to Brazil for the 'Development Progress' project, we produced reports on sustainable energy and hydropower projects. Energy-sector experts told us that this lack of attention to demand-management needs to be urgently addressed. Meanwhile, hydropower, which has long been considered the obvious solution to the country's electricity-generation needs, is no longer working as planned. The energy ministry should reconsider its ambitious plan to double national electricity generation capacity by 2030 with 164 gigawatts of hydroelectric power, predominantly in the Amazon, where public discontent with such projects is growing. The Brazilian Amazon occupies a large area, but is not an empty space that can simply be turned over to more and more large hydropower dams. Run-of-river hydro schemes in the Amazon that are designed to flood less land and displace fewer local people have resulted in less water storage, which means there is less of a hydrological buffer against low rainfall. Brazil's new energy minister should accelerate auctioning of investment in other energy sources, including bio-energy (bagasse— a byproduct of sugar cane milling), wind and solar power, which the country has been very slow to develop despite its long Atlantic coast and regions with high levels of solar radiation. Furthermore, thermal power represents a key reserve-energy source. Thermal power plants are generally quicker than hydropower schemes to commission and build (rather than being site-specific, they come 'off-the- shelf ') and can be located closer to population centers, reducing transmission losses.
João Augusto de Castro Neves, Latin America director at the Eurasia Group in Washington: The government recently reaffirmed its intention to wean the electricity sector from subsidies that are draining fiscal accounts. But while the decision will enhance transparency in the sector and bolster fiscal accounts, transferring higher electricity costs to consumers in a context of sluggish economic activity and persistently high inflation will not only generate popular discontent, but it may also make an economic recovery more difficult. President Dilma Rousseff 's larger liability, however, is the potential for power rationing in coming months given the supply-demand imbalance caused by a drought with already-low water reservoir levels in hydro-electricity power dams. While the decision to raise tariffs will certainly help curb consumption, it probably will not be enough to fully resolve the supply-demand imbalance in the sector. Ongoing drought and a recent heat spell in parts of the country make it unlikely that reservoirs will reach safer levels by the end of the rainy season in April. While the odds of Rousseff decreeing full-blown power rationing before April are still low, the government is likely to adopt some partial measures to curb consumption in coming weeks. But for political reasons, these measures, some of which have already begun to be implemented, will be laid out discreetly. In addition to the tariff increase, the likely actions could include selective brownouts, the reduction of voltage current in power lines, allowing power-intensive industries to voluntarily reduce production levels and sell the extra electricity in the market, and restricting access to key water reservoirs, which could affect waterway transportation, irrigation and even consumption.